Brazilian Federal Supreme Court (STF) rules on state value-added tax (ICMS) on electric power and telecom services
The Brazilian Federal Constitution established that States may assign different ICMS rates depending on the product or service sold. Nevertheless, it is necessary to observe the selectiveness of such goods and services since higher rates should be applied to goods and services that are less essential or goods considered superfluous, and lower rates should be applied to goods and services considered essential.
However, Brazilian states set rates for ICMS on operations involving sale of electric power and telecom services that are higher than the ordinary rates levied on sales of common goods and services, violating constitutional rules.
In this sense, this month (December of 2021) the STF decided that, since electric power and telecom services are essential to the population and to overall economic activities, their ICMS tax rate should be the regular rate (around 17%), and the setting of higher rates by the States is unconstitutional.
The decision has general repercussion, as it will apply to all taxpayers that purchase electric power and telecom services.
The STF determined that the effect of the decision will only be applied as from financial year 2024, except for those lawsuits filed up to the date of the commencement of the judgment, on February 5, 2021.
Modulation of the effects of the decision surprised taxpayers since they were expecting that the STF would determine that the ruling would be valid for suits filed up to the day before the notice of the final decision.
Taxpayers that filed suits before February 5, 2021, will be able to recover ICMS taxes overpaid in the last five years, as from the date their suits were filed.
Federal Administrative Tax Appeals Council (CARF) alters interpretation regarding taxation of income of companies abroad
Federal legislation establishes that Brazilian taxation of results accrued by foreign subsidiaries, affiliates and branches will occur under the worldwide tax system.
On the other hand, Article 7 of the Tax Treaty to avoid double taxation and prevent tax evasion signed by Brazil, establish that business profits of a foreign enterprise may not be taxed by Brazil.
Nonetheless, the Brazilian Federal Revenue Bureau (RFB) applies worldwide taxation, even in cases where the foreign company is located in a State that has a treaty signed with Brazil, alleging that there is no incompatibility between Brazilian law and such agreements/treaties.
Given this impasse, the Supreme Federal Administrative Tax Appeals Council (CSRF – the highest court in the administrative sphere) concluded that domestic law is contrary to the Treaties, and decided that the provisions of the international agreements should prevail, thus preventing taxation by Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL).
The decision in question resulted from a tie among the council members and only occurred due to the so-called “pro-taxpayer tie-breaking vote” pursuant to Article 19-E of Law 10.522/2002, which establishes that, in case of a tie, the decision has to be resolved in the taxpayer’s favor.
Nevertheless, it is important to point out that the constitutionality of the “tie-breaking vote” is under discussion by the STF, through Direct Appeals for Unconstitutionality, and if the”pro-taxpayer tie-breaking vote” is extinguished, it is possible that there will be a new alteration in the interpretation reached by administrative councils/courts.
CARF – No Individual Income Tax (IRPF) on gains resulting from stock option plans
In analyzing a debate involving the taxation of gains accrued through stock option plans, the Federal Administrative Tax Appeals Council (CARF) decided, in a pro-taxpayer tie-breaking vote, that such agreements were mercantile in nature, rather than some form of remuneration.
As far as the tax authorities are concerned, gains obtained under stock option plans should be interpreted as yields resulting from work. In the concrete case judged, the taxpayer was assessed for omission of earnings in his/her income tax return.
In his/her defense, the taxpayer alleged that the stock option plan was not linked to performance and the productivity targets of the professionals involved, for which reason it could not be considered remuneration.
After conducting a meticulous analysis of the stock option plan agreement, the CARF decided that it was not to be classified remuneration, as they believed that the key elements of a mercantile agreement were present (voluntary, onerous, and risk-taking nature).
In this sense, the only taxation that would apply would be the imposition of Income Tax over any capital gain, when the shares acquired are sold.
CARF – Revenues derived from licensing or assignment of use rights for software developed abroad are subject to the non-cumulative PIS and COFINS contributions
By majority vote, the CARF decided that agreements for licensing or assigning use rights for computer software programs developed overseas should be considered as importation. Thus, they would be subject to the non-cumulative system for payment of the federal Social Contributions known here as the PIS and COFINS.
Under applicable Brazilian legislation (Law 10.833/04, Article 10, XXV), there is a rule that data processing companies which accrue revenues from the licensing or assignment of use rights for software are subject to the cumulative PIS/Cofins. However, paragraph 2 of such article contains a specific norm hindering such rule in the case of imported software.
For the council members, the manner of importing the software is not relevant for purposes of applying the legal provisions, and the licensing or assignment of the right to use imported software suffices for application of the non-cumulative system for such contributions.
RFB Clarifies Levying of WIT on Capital Gains Accrued in Brazil by Portuguese Company
Brazil’s Federal Revenue Bureau (RFB) has published a Resolution of Inquiry providing that the IRRF (withholding income tax) is to be levied at the rate of 15% on capital gains accrued in Brazil by a Portuguese Holding Company resulting from sale of the latter’s equity interest in a Brazilian company.
Item 6 of the Brazil-Portugal Protocol of Tax Treaty provides the Most Favored Nation Principle, so, given the subsequent signing of the Tax Treaty between Brazil and Israel, which sets a maximum capital gains tax of 15%, such determination should be applied to the tax relationship involving Brazil and Portugal.
Accordingly, for a company resident in Portugal that accrues a capital gain on sale of its equity interest in a Brazilian company, the gain will be taxed at the rate of 15%, rather than according to the progressive table, where rates vary from 15% to 22.5%.
Federal Government Imposes Restrictions on Use of Worker Food Program (PAT) Tax Benefit
A Recent Federal Government Decree, entitled “Infra-legal Labor Regulatory Framework”, among other alterations of labor norms, introduced new rules to limit the tax deductibility of expenses incurred by Brazilian companies on covering their worker food costs.
The limitations are as follows: (i) the deduction will be applicable only in relation to the amounts disbursed on workers who receive up to 5 (five) minimum monthly salaries, encompassing all workers of a beneficiary company that provides its own meals or subcontracts entities for food supply; and (ii) the deduction is only to encompass that portion of the benefit which corresponds to the amount of no more than 1 (one) minimum monthly salary per employee.
The issue has been questioned in court by corporate taxpayers, in that the limitations introduced by the Decree are not covered by a law, which is contrary to Brazilian taxation rules.